A Note on the Relation between the Rate and Variability of Inflation

• DOI: 10.2307/2553204
• Publication Date: 2006-06-19T13:31:16Z
• Authors: Dennis E. Logue; Thomas D. Willett
• Keywords: 0502 economics and business; 05 social sciences; 8. Economic growth; 1. No poverty

In recent years there has been considerable interest in the concept of optimum rate ancitipated inflation-that which taxes holding cash balances such that marginal excess burden from inflation tax equals cost most efficient alternative method raising government revenue. (For discussion, and references to earlier literature by Bailey, Freidman others, see Tower (1971), Willett (1972) Barro (1972).) This related ideas have used not only as intellectual exercises but also basis suggestions concerning macroeconomic policies. However, Harry Johnson noted, Contrary assumptions 'inflation tax' model, does proceed at a steady well anticipated rate, proceeds erratically with large politically determined variations price increase (Johnson, 1967, p. 290). Such unanticipated or deflation may entail welfare cost. (On costs, surveys Bronfenbrenner Holzman (1963) (1967, pp. 104-142) cited these works.) Of course, recognition actual rates will general be perfectly itself call for modification calculations inflation. If variability is independent its average then situation particular target influence cyclical hence this consideration need taken into account calculation however higher were expected yield degree inflation, costs additional uncertainty would subtracted net benefits corresponding predicted Thus, if systematic relationship between their unpredictability, country's should revised upward downward take difference might accompany different addition, we note relevant measure an absolute rather than relative one (see Logue Willett, 1975). paper seek information on predictability examining past experiences number countries during postwar period. course experience always safe guide future performance. especially true present case because much observed induced deliberate policies aimed stabilizing level expectations.